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Do we need government intervention in the form of Competition Policy? If so, why?

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Q. Do we need government intervention in the form of Competition Policy? If so, why? With the advent of the welfare state, laizzez faire is outdated. Competition Policy is a form of government intervention, when the market fails. It is an attempt by the government to provide competition to enhance economic efficiency by promoting or safeguarding 'competition' between firms. With the aid of rules for the conduct of firms and their structure, it aims to prevent abuse and arising of monopolies. Competition policy is concerned with the welfare implications of imperfect competition. Economic theory predicts that either due to collusion or independent actions, prices in imperfectly competitive markets may be set above the competitive level, and portray allocation inefficiency Competition Policy is based on neo classical economic theory, which assumes that society benefits when a state of perfect competition prevails in the market. Perfect competition is used as a benchmark to formulate Competition Policy since the level of output in long run equilibrium is optimal from society's outlook-i.e. it is Pareto efficient. The forces of demand and supply determine price in such a market and the firms face a perfectly elastic demand curve. ...read more.


E.g., when China opened her economy to foreign firms, a number of western firms established joint ventures and alliances with Chinese firms, which in turn gave them an insight into local bureaucratic procedures and provided local knowledge about consumer needs and market conditions. When further expansion is limited in a particular market, a firm wishing to expand further, has to diversify and move into new markets. In this situation, mergers and acquisitions become more important since the firm can buy in the expertise and knowledge about the new product, rather than learn by doing. We cannot assume that a concentrated market is necessarily a non-competitive market. Large firms may face competition from other large firms to the extent of being unable exploit market power and impose welfare costs on society. A degree of monopoly power is not necessarily bad, as it provides incentive for research and development. Monopolies may not always arise from mergers or cost conditions but simply as the result of successful product or process innovation. If a firm introduces a new product, its success or failure depends on the consumer response. If sufficient consumers are willing to pay the asked price, the product stays. ...read more.


A firm has monopoly, if an individual firm is supplying 25% or more of the market share or the merger involves gross worldwide assets exceeding � 70 million in value and can be referred to the Competition Commission. The Competition Commission is divided into 2 parts: a reporting side, which is concerned, with traditional inquiries into scale and complex monopolies and mergers and takeovers and the Appeals Tribunals that will hear appeals against the decisions of the DGFT including the penalties he levies following his investigations. Penalties levied for infringement are up to 10% of UK turnover of the concerned firm. UK competition policy is now aligned with the EU competition policy on restrictive practices and monopolies. The approach to competition policy in the UK has always been pragmatic, not leaning in any direction of any particular theoretical approach Competition Acts reduce firms' incentive to collude as the probability of detection increases, now that the CC has the right to enter premises and seize information and also the scheme to provide concessions to firms which are first to provide information of the existence of a cartel and its activities. This types of policy of the OFT has been successful in flushing out secret cartels in the US. In the quest for efficiency, innovations, inventions and quality control, Competition Policy is an imperative. 1 ...read more.

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